Thompson & McCarty, P.C. CPA

The decision that all business owners will eventually face is how to handle their accounting needs. Good accounting is an essential piece of real business management. Accounting is the collection and or capture of financial transactions and the subsequent presentation of that data in the form of an income statement, balance sheet, and statement of cash flows. The very basis for measuring the effectiveness of an entities transactions is present on the statements listed above. Therefore, it is impossible to manage a business without an effective accounting model. There are two basic choices for creating an accounting system. One can outsource the accounting function or it can be set up as in house business activity. This article will cover the advantages and disadvantages of both methods in the hope of assisting business owners with making a decision on what is best for their companies.

Outsourcing is a word that elicits many different feelings from people. The customary accounting engagement for small business (bookkeeping) is outsourcing, hiring a payroll company to process payroll is outsourcing, in fact any part of a business model where one is acquiring goods or services is a form of outsourcing. So if you get upset when you hear the term outsourcing just relax and understand that everybody is outsourcing something.

The traditional accounting engagement for small businesses is basically several services rolled into one engagement. Typically one would hire an accountant to enter disbursements and income into a General Ledger, record various periodic expenses, reconcile bank statements, prepare sales tax and payroll reports, and produce compiled financial statements. Any combination of the above services are possible depending on the clients needs. This process has one BIG downside. The feedback for your business is delayed for at least 30 days and often longer. This is a weakness in the traditional engagement that can not be overcome. The strengths of this process are that trained accountants and bookkeepers process your financial data more efficiently than one can hire and train staff so the cost is usually less. Also, due to the expertise of the accounting firm, one gains various business insights and advantages that they would not have if operating alone. Obviously, at the point when a company has enough accounting transactions to devote full time staff to the accounting function the employee issue is no longer true. It is at this point that it makes sense to pull the accounting in house.

The situation above is a cut and dried example when a company knows that it is time to take the accounting process in house. However, most of the outsource vs. in house decision is not that cut and dried. Moreover, many situations call for the client to perform at least some of the accounting function, even when sending the bookkeeping function outside. An example of this is any retail environment. One of the Key Performance Indicators (KPIs) for a retail business is average ticket. A retailer would need to implement some kind of Point of Sale (POS) system to track average ticket price. This is because having it tracked externally is cost prohibitive and it is just easier to capture the data at the POS. Contemplate, just for moment, the difference between a retailer doing 30-100 transactions a day to a homebuilder working 4-6 projects a year. The homebuilder can outsource his entire accounting function and get more reliable, detailed reports for his business cycle (time it takes to complete a house). The retailer is going to use his staff and other systems to capture at least some of the data. The size of the operation will determine how much of his accounting can be efficiently outsourced. The bottom line is that it is often neccessary to blend in house with outsourced accounting services to get the accounting handled well.

Challenges that must be solved when taking your accounting in house are numerous. Not the least of which revolves around human resource management. Any proper accounting system has to have segregation of duties. To do otherwise is like hiring the fox to guard the chicken house. It is desirable to determine who will provide what function and how to best maintain the segregation of duties before beginning the conversion or start up of an in house accounting system. Then the proper Mangement Information System (MIS) should be selected and implemented. Remeber that accounting is only one part of a complete MIS system. It is better to take the total MIS needs of an organization into consideration when choosing one's accounting solution.

Obviously the above is referring to situations where more than the owner is involved in the accounting function. Which brings me to the most important part of this entire discussion. Based on my experience, I have never seen a business owner benefit from trying to perform his own accounting. A business owner can typically earn more than the cost of high quality accounting services by working on his business instead of working on his books. That said, I have seen people benefit from using Quickbooks properly and having frequent reviews by accounting professionals. I have never seen a non accounting professional set up and properly use Quickbooks alone. So, if you want to use Quickbooks to help run your business. get some help early and align yourself with an accountant that knows Quickbooks.

There is no one size fit all solution for outsourcing vs in house. One should consult with an accountant when making this decision. An accountant can help you avoid making many mistakes and assist you in blending the right services for your business. If in house is the way to go, then proper planning before selection and implementation of an accounting solution will yield superior results. Finally, remember capturing income and expense data correctly is the foundation of real business management. A good foundation is essential to any building that will stand up, yours included.